As some of youmay or may not know, I work at a sort of startup. Not like a google, free food with all crazy stuff start up. My company is in finance, as I’ve mentioned, and we have a foreign parent providing all the capital. Instead, we’re run with the intent of being as nimble and innovative as possible while having the immense financial backing of a foreign parent with a whole lot of cash and an incredible long term view of how to make money (not going to lie, I love it). The result is that I’ve seen a lot of things that start ups have gone through: the scaling of a product, the building of the workforce, the decision between hiring an extra person or just letting things ride for a year. And because we weren’t created with the concept of building an idea to sell for a profit inside of three years, we’re focusing on sustainability.
This kind of thought has been on my mind a lot lately and I feel like working it out. It’s not quite personal finance and is more entrepreneurship but still, hear me out. I’m sure there is a finance lesson in here. I promise, as with most of my inane ramblings, there will be a point. That point: investing.
Facebook seemed like a great investment to a lot of people. A billion users, everyone is addicted, how could it not make money. And then the IPO happened, the stock rose, it fell. Then it fell some more. NASDAQ got sued, Morgan Stanley got sued, everyone got sued. In general, everyone was pretty pissed. Well, except Facebook. You see, they did everything right. They raised the most money possible, according to demand, for their company. Of course now it sucks for everyone that bought the stock (with a short term viewpoint) but that’s life.
IPO’s, especially start type companies that haven’t been around for a while, are tough. If you had purchased stock in the company that makes Annie’s Mac and Cheese (my favorite, if you ever want to get my some food) instead of Facebook, you would have brought home over a 30% return by now. Why is this? Annie’s was private too, how come their stock went up. And this is what drives us deep into the concept of the start up as an investment.
You see, Annie’s wasn’t a start up. Not all IPO’s are actually. In fact, several IPO’s each year are mature companies with solid business plans and proven track records of profits. While there is risk, as with any equity investment, there is a history you can use to discern whether or not the IPO gives you good value for your dollar. With a start you don’t have that chance. Instead, you have to figure out if the deal is worth while. Even then, you’re still stuck. Start ups have the unique problem in business of growing even when nothing else is. A start up in a mature industry will grow, like crazy, simple because the market dictates that they have to have a bit of the pie (if they are run correctly). So you’ll look at their numbers and think that they can continue the torrid pace and become the biggest open source software company working on a linux platform in the industry. Then the plateau, see no more organic growth and that’s the end. Or maybe their picture filtering software can’t match instagram. Or their fake gold on their fake mafia facebook game just isn’t popular enough anymore.
The point is that not every idea is profitable. Start ups are fun. They create cool things, they have great people working for them and when things work out, they turn into Microsoft or VMware. But most of them end up like…well I can’t remember the name but they were not a good start up. Should this fact deter you from investing in a start up or working for one? No! Working for one, although in the enterprise space, is one of the best decisions I’ve ever made. Learning how to run a business from the ground up will benefit me for years. It’s a masters in entrepreneurship except they pay me for it. On the same hand, investing in a start up (at the IPO or through a website like sharespost) is also worth it. However, the company needs to make sense. For example, Warren Buffett didn’t invest in Facebook. Also, sorry, I talk about Mr. Buffett a lot. Whatever, he’s awesome.
Anyway, the general idea here is that if you can understand what a start up is doing (oh, you’re offering networking gear that has open source, linux based software that can be configured for any business? Right on!) they aren’t necessarily a bad investment. Even more, they might not be a bad place to work. As I mentioned earlier, I’m learning more from working at a start up that I would at a regular firm. And working for one of these firms is just as much of an investment as buying into them.
When all my rambling is said and done, what I’m really trying to say is that if you evaluate a start up, either as a job or a capital investment, you will find that if you don’t understand it, the risk isn’t worth it. However, if you understand it, whether it is a new oil pump company or an electric motor or a networking software firm, you’ll realize that this can be something. What it comes down to is you. And in investing, that’s almost always the case.